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Cash flow is a common problem that can make it difficult for small businesses to stay afloat. Do you have accounts receivable invoices that will be coming soon, but you don’t have enough cash to pay your current bills? If you are running into cash flow issues, then you need to enlist the help of an experienced small business accountant.

To keep up with overhead costs and ongoing expenses, you need to be sure that you are bringing in more money than what is being spent. The success of your company hinges on the positive cash flow, resulting in excess profits that can go to the owners and investors.

Primary Cause of Cash Flow Issues

What is the primary cause of your cash flow issues? Usually, these problems are based on the outstanding money that needs to be collected for accounts receivable. The truth is that this money can’t be considered income until you have the cash in your bank account. Even though you are anticipating payments that will be coming through soon, you can’t depend on that money until it has been received and the check clears.

Each time you put together an invoice, it is basically a short-term loan to that customer. You are trusting the customer to pay the money as agreed, but people don’t always follow through to pay as planned. Sometimes, the customer is dealing with their own cash flow problems, causing a domino-effect on their own overdue bills.

Unfortunately, it is common for business owners to be waiting on payments from customers. To make problems worse, small businesses don’t always have a good system in place to follow-up regarding collections. If you want to ensure the long-term success of your business, then you need to make sure that you are proactive to collect on any past-due balances that are owed by your customers.

Why Does Cash Flow Matter?

If the money will be paid eventually, why does it matter for you to receive timely payments? Without the cash to keep up with current expenses, your business will go under. You need cash on hand to cover costs such as:

Payroll

Rent or mortgage on the building

Utilities

Restocking inventory

The option to take advantage of expansion opportunities

Purchasing office supplies

Meeting debt payments

Reinvesting in business development

Be prepared for financial emergencies

For example, if the cash isn’t available to cut checks for employees on payday, then it is likely that you will lose your staff. These people will be angry and walk away from the company, resulting in a situation where you no longer have a team to service the needs of your customers.

It is a vicious cycle: cash flow problems can cause you to lose employees. At the same time, losing employees can contribute to cash flow issues because you will lose business. So, you need to take a preventive approach to ensure that you have the money that is needed to keep up with the operating costs of owning a business.

The Size of Your Company Impacts the Size of the Outstanding Accounts

Every company has outstanding invoices that need to be paid by the customers. As a company gets bigger, it is expected that these accounts receivable numbers will grow as well.

You need to learn how to manage you accounts receivables to ensure that your customers send payments in a timely manner. Keeping up with the growth will give you the opportunity to continue growing.

You don’t necessarily need to do all of these tasks on your own. In the beginning, it is common for a small business owner to oversee most of the financial details, including bookkeeping and collections. But, eventually, you will need to hand these tasks over to a professional team so that you can focus on other aspects of running a business that need to be addressed.

How to Collect on Past-Due Invoices

Now that you can see the importance of staying current with collections, you are probably wondering how you can implement this strategy into your business. It is one thing to understand that you need to be collecting on the invoices, and it is a whole different situation to make changes to follow through on these principles.

These are a few strategies that you can use to collect the money that is owed by your customers:

Ask Questions to Understand the Situation: Without an understanding of the customer’s current situation, it might be hard for you to find a win-win situation. Most customers have the desire to pay the bill, but they are running into issues with disorganization or cash flow problems. So, you should start the conversation by asking why the invoice hasn’t been paid. Sometimes, it is as simple as the invoice being overlooked on a messy desk, and they will send the money right away. Other times, they might need a little more flexibility in the payment terms. So, you can have an open discussion to understand their needs, and then put together payment terms that will work for everyone involved.

Put Together a Collection Policy: One of the reasons that you aren’t receiving the money that is due is because you don’t have a solid collection policy in place. Take time to design a plan that will work for your business, then make sure that you are consistent in following through in the enforcement of that plan. Include details about fees and interest costs that will be accrued for the past-due balances, and provide a copy of these details to every customer. The best solution is to inform customers about the collection policy in advance so that you can prevent missed payments in the future.

Send Reminders: In the beginning, you shouldn’t jump to conclusions that the customer isn’t going to pay the invoice. Instead, send a gentle reminder with a copy of the invoice so that they can remember the money that is due. This reminder could be in the form of an email or a letter in the mail. Try using different communication channels if you don’t hear back.

Follow Up with a Phone Call: If you are sending invoices in the mail or via email, it is possible that the paperwork is overlooked in a busy office. Send the reminder, then consider the advantages of following up with a conversation. A quick phone call can go a long way to clear up any misunderstandings regarding the payment of the invoice.

Provide Other Payment Options: Is the customer skipping a payment because they don’t have the cash available to write a check? Offer another option that can be used to pay the bill. For example, you might consider a credit card payment option if that works better for the customer. Business owners often prefer to avoid credit card payments because of the payment processing fees that are incurred. But, these fees are much better than not receiving the payment at all.

Setup a Plan for Installment Payments: Another way you can work with the customer is by finding a payment schedule that will match their abilities. For example, instead of demanding the full payment right now, you could offer installment payments to be sent over the period of a few months.

Send a Certified Letter: A certified letter probably isn’t worth the cost if you are trying to collect a small balance. But, if you have a customer with a large outstanding invoice, then it might be worth the effort to send a certified letter requesting payment. Talk to your lawyer to get an official letter threatening legal action if the money is not provided by a certain day.

Hire a Collection Agency: In the worst situations, you might consider hiring a collection agency to follow up. If you choose this option, expect that you will pay a high percentage of the payment to the agency. Typically, you will only need to pay if the money is collected. Even if you can only recover a partial payment and a portion of that goes to the agency, you are still in a better financial situation compared to not receiving the money at all.

There isn’t one strategy that works for every business, so it is best to consider the needs of your company. You can use one or more of the strategies listed above to find the best solution to stay ahead of your accounts receivable issues.

Hire an Accountant to Help

As a business owner, there are many responsibilities that you need to juggle each day. It can be overwhelming to keep up with everything, especially if you are facing stressful cash flow problems. Instead of feeling bogged down by the responsibility, you should consider the benefits of hiring the experts to provide the personalized support that you need.

Here at Easier Accounting, we understand the ins-and-outs of financial management for small businesses. Our services are designed to make it easy for you to keep up with the responsibilities of growing your business. If you have questions about cash flow, accounts receivable, or any other financial issue, we invite you to contact our team to learn more about the ways that we can help: (888) 620-0770